An American Industrial Policy Experiment Begins

An American Industrial Policy Experiment Begins

An American Industrial Policy Experiment Begins

Sometimes “industrial policy” is defined very broadly, as when people say: “Every country has an industrial policy–even not having an industrial policy is a kind of industrial policy.”

But in a more specific meaning of the term, “industrial policy” doesn’t include, say, support of K-12 education or university research and development or a well-regulated banking system. Instead, it refers to when government targets the growth of specific industries with subsidies or trade protection, in the belief that these industries will repay the near-term government support by leading to stronger growth that benefits the broader economy in the future.

In the more limited use of the term, the United States is embarking on a major experiment in industrial policy. The Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act focuses $280 billion over the next decade on building a domestic semiconductor manufacturing industry. The Inflation Reduction Act (IRA) commits $579 billion over the next 10 yearswith a heavy focus on promotion of noncarbon methods of producing electricity from non-carbon sources (mainly solar and wind) and supporting energy users in switching to the use of such energy (including subsidies for electric cars). The Infrastructure Investment and Jobs Act (IIJA) commits $1.2 trillion over the next decade to standard infrastructure like roads, bridges, rail, and transit, which don’t fit into a narrow definition of infrastructure, but also includes less-discussed infrastructure like broadband, electrical power, and support for non-gasoline infrastructure for cars.

In an article from Deloitte InsightsWilliam D. Eggers, John O’Leary and Kevin Pollari discuss “Executing on the $2 trillion investment to boost American competitiveness” (March 16, 2023). They emphasize that the new laws involve large amounts of money, with many different funding streams, all with different compliance standards, that need to be run and coordinated across a large number of federal agencies. In addition, the chances of success will often depend on interactions between these programs, not on the sum of the individual programs.

It stands to reason that industrial policy isn’t simple. If industrial policy was as simple as tossing a log on the fire and getting the desired heat, then every nation would be able to do it. Having a boom in manufacturing jobs, or union jobs, or strong industries related to semiconductors, green energy jobs, steel, or cars, would just be a matter of passing the legislation. But it’s obviously not that simple and easy for industrial policy to work, not in the United States and not in other countries either.

There are many examples of these complexities and constraints: I’ll just give a couple of examples here. The Deloitte authors write about the infrastructure act:

Under IIJA alone, more than 45 federal bureaus and 16 federal agencies and commissions are allocated funding for 369 new and existing programs. Grants fund more than 200 programs and represent 78% of the total funding. … These three new laws establish more than 160 entirely new programs. IIJA alone has created 129 new programs with more than $226 billion in funding. Seven existing programs worth $275 billion have been substantially revised or expanded. In the IRA, out of the total $228 billion appropriated across 18 federal agencies, more than $80 billion was appropriated for 34 new programs.

Thus, the basic workability of the new laws depends an ability to administer the money across these bureaus and agencies and commissions and grants–ranging across federal, state, and local government actors as well as universities and the private sector–and to do so in a way that actually boosts competitiveness and isn’t just a money trough for the politically connected.

As another example, “The CHIPS and Science Act, for example, has earmarked $10 billion for the Department of Commerce to create 20 regional technology hubs across the United States  in partnership with universities and private businesses.” I’m a supporter of funding for regional technology hubs, but I’m not fool enough to think that organizing them is easy.

It’s not just bureaucratic constraints, either. The Deloitte authors note an estimate that the “the country will need one million additional electricians for the clean-energy transition.” Maybe that estimate is overstated? Maybe we only need several hundred thousand more electricians. But all the plans for installing new public and home charging stations, as well as building new electricity charging facilities and transmission lines, are going to fall flat if there aren’t plenty of electricians to do the work. In turn, the electricians won’t be able to do their work without getting necessary permits, which in turn will have to pass zoning, land-use, and environmental regulations and lawsuits.

Moreover, all of this needs to happen in a way that is accountable and, if not fraud-proof, at least fraud-resistant. The authors call this the “thieving squirrel problem”:

The “thieving squirrel” problem: You put seeds into the birdfeeder, but clever, agile, and highly motivated squirrels manage to eat a big share. The only answer is a birdfeeder designed to limit access and frustrate raiders. With funding levels this large, the problem of waste, fraud, and abuse is real. Especially for agencies that are disbursing sizable grants for the first time, controls baked in up front will be critical. Governments need to ensure proper compliance, reporting, and transparency—or risk rewarding the squirrels and undermining overall trust in the process.

Around the world and over time, “industrial policy” narrowly understood doesn’t have a great reputation. There are a few successes, and a distressingly large pile of failures. It’s worth remember that the resources committed to industrial policy–including money, capital, and human talent–could have been spent on other uses. For example, a big chunk of the $200 billion per year or so being spent on these programs could have gone into supporting pregnant mothers and infant children, or rebuilding public schools, or training a few hundred thousand electricians. Perhaps setting up a steady increase in taxes related to pollution and carbon emissions over time, and then letting the incentive effects of such taxes percolate through the economy, would be more effective–but spending more money is always a more popular way of seeking change.

It’s impossible to prove that industrial policy can’t ever work, for the same reasons that it’s often very difficult to prove a negative. Thus, even if this particular US industrial policy experiment fails, I expect that its supporters will just explain that with more money or commitment or vision or energy or an improved structure, it could easily have succeeded. So this post is just laying down a marker: When these pieces of industrial policy legislation were passed, the comments of supporters often suggested that this iteration of industrial policy was nearly as simple as tossing a log on the fire–virtually certain to succeed. If the programs are only mild success, or a considerable failure, the supporters should have to eat their words.

I hope the supporters are correct. I would prefer to see public money well-spent. In a few years, we can evaluate the results. But the administrative, political and economic conditions for success of industrial policy are a difficult set of obstacles to cross. The Deloitte author do not predict success or failure, but they do say: “Once a law is passed, there is a temptation to assume that desired results will follow. But much will depend on how government actually executes its strategy.”

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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